Treasuries Drop as Factory Data Spur Rate-Increase Bets

July 1 (Bloomberg) -- Treasuries fell the most in almost
two weeks, extending the first monthly drop since March, on
speculation U.S. economic growth is robust enough for the
Federal Reserve to raise interest rates next year.

Yields on benchmark 10-year notes climbed from a three-week
low reached June 27 as measures of U.S. manufacturing showed
expansion in June and China’s factory output grew at the fastest
pace this year. BlackRock Inc., the world’s biggest money
manager, forecast the first increase in borrowing costs for the
second quarter of 2015. A report this week may show employers
added more than 200,000 jobs for a fifth month.

“The global manufacturing recovery is on pace,” said Ira
Jersey, an interest-rate strategist in New York at Credit Suisse
Group AG, one of 22 primary dealers that trade with the Fed.
“The market had gotten a little bit overbought and people who
were long are looking to take chips off the table before
payrolls.” A long is a bet the price of a security will rise.

The benchmark 10-year yield rose three basis points, or
0.03 percentage point, to 2.57 percent at 5 p.m. New York time,
according to Bloomberg Bond Trader data. It earlier added four
basis points, the biggest gain since June 19. The average yield
for the past decade is 3.41 percent. The 2.5 percent note
maturing in May 2024 fell 9/32, or $2.81 per $1,000 face amount,
to 99 14/32.

The Bloomberg U.S. Treasury Bond Index declined 0.1 percent
in June. It gained 3.3 percent for the first half of 2014,
reflecting a contraction in the economy from January through
March. Treasuries due in 10 years or more gained 12 percent this
year, according to the index, and those due in one to three
years returned 0.4 percent.

Trading Range

The 10-year Treasury note yield is trading in a range of
2.50 percent to 2.75 percent as the market awaits clarity on the
Fed’s plans to exit bond buying under its quantitative-easing
strategy, according to Sharon Stark at D.A. Davidson & Co.

“I don’t see a break out until the fall, when the Fed
decides whether they end quantitative easing in October or
December,” the fixed-income strategist said from St.
Petersburg, Florida. “The Fed can be data-dependent between now
and the fall. But once QE ends, they’ve got to telegraph some
plan going forward.”

Policy makers cut monthly debt purchases to $35 billion at
their June 17-18 meeting, down from $85 billion last year. They
left the target rate for overnight lending between banks in the
range of zero to 0.25 percent, where it has been since December
2008.

BlackRock’s View

The Fed rate will probably be increased in the second
quarter of next year, Stephen Cohen, BlackRock chief investment
strategist for international fixed income, said in London today.
The company’s view is not far from consensus and there would
need to be a big improvement in U.S. economic data to change the
market’s view, Cohen said.

The Treasury yield curve will steepen as data improves and
consumer prices rise, he said at a media briefing. The yield
curve is a chart showing rates on bonds of different maturities.

The gap between yields on U.S. two-year notes and 30-year
bonds was 2.93 percentage points. It touched 2.86 percentage
points on June 26, the least since May 2013.

Traders see about a 54 percent chance the central bank will
raise its benchmark rate to at least 0.5 percent by July next
year, up from 43 percent odds at the end of May, Fed Funds
futures show.

Factory Gauges

U.S. government debt remained lower today as the Markit
Economics index of U.S. manufacturing increased to 57.3 in June,
the highest in more than four years, from 56.4 a month earlier,
the London-based group said today. Readings exceeding 50 in the
purchasing managers’ gauge indicate expansion. The median
forecast in a Bloomberg survey of economists was 57.5, as was
the preliminary reading.

“We’ve been seeing generally good signs of activity across
the manufacturing sector,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer.

The Institute for Supply Management’s manufacturing index
was little changed at 55.3 in June from 55.4 in the prior month,
the Tempe, Arizona-based group’s report showed today. The median
forecast of 88 economists surveyed by Bloomberg called for 55.9.

U.S. gross domestic product shrank at a 2.9 percent
annualized rate in the first quarter, the worst reading since
the same three months in 2009, the Commerce Department said June
25. Harsh winter weather in early 2014 was blamed in part for
the contraction.

‘Bounce-Back’

“The market is looking for some confirmation that first-quarter gross domestic product was an aberration and that
second-quarter GDP is a real bounce-back,” said Ray Remy, head
of fixed income in New York at primary dealer Daiwa Capital
Markets America Inc. “It’s all about the data.”

In China, the purchasing managers index measuring
manufacturing increased to 51 in June, the highest level since
December, according to the National Bureau of Statistics and the
China Federation of Logistics and Purchasing. A private
manufacturing index from HSBC Holdings Plc and Markit Economics
also climbed to the most this year.

Investors in Treasuries increased bets the prices of the
securities would drop, according to a survey by JPMorgan Chase &
Co. for the week ending yesterday.

The proportion of net shorts was 27 percentage points,
according to JPMorgan, compared with net shorts of 21 percentage
points in the previous week. Outright shorts rose to 38 percent
from 34 percent, while outright longs dropped to 11 percent from
13 percent. Investors cut neutral bets to 51 percent from 53
percent.